Stocks close sharply up, driven by earnings

ByAbby SchultzApril 20, 2011

In this April 19, 2011 photo, traders work on the floor of the New York Stock Exchange in New York. Strong earnings statements in the U.S. helped global stocks rebound further Wednesday, April 20, after a warning over the U.S. credit rating earlier this week had rattled investors around the world.

All key S&P 500 sectors gained, led by technology, energy and consumer discretionary.

The market continues to wrestle with two simple things: cautious optimism around the recovery and uncertainty over the direction of monetary and fiscal policy, said Doug Godine, head of equities at Signal Hill Capital.

The signs of a good recovery, and not an overheated one, are evident in strong corporate balance sheets and in reasonable expectations by corporations, Godine said.

That good news, reflected in Wednesday's rally, is tempered by the lack of clarity over the future direction of monetary and fiscal policy as Congress and Obama wrestle over the budget, he added.

"What is going to be our stance on debt ceilings? What will be our stance on budget cuts? Where will this shake out in terms of budget bill?" Godine asked. "At some point we’re going to have to figure out what our long-term monetary policy is."

Mark Lamkin, CEO of Lamkin Wealth Management, agrees first quarter earnings are giving investors a legitimate reason to buy stocks, but he is bracing his clients for earnings to suffer "deep" into the second half of the year as rising costs of energy and raw materials hit corporate earnings, along with the effects of austerity policies in the U.S.

"You’re setting up this market for a pretty big correction in the second half of this year," Lamkin said, expecting the market will fall between 12 and 14 percent.

For now, however, Lamkin remains invested in the market, saying "I’m going to ride this thoroughbread as far as it goes," but he added that he's "not afraid to go to 50 percent or 60 percent cash if these trends start to break down."

Investors cheered earnings as they showed companies are benefiting from growing global demand for goods and services. Manufacturers United Technologies and Eaton, for instance, reported better-than-expected results before the market opened Tuesday as global demand for their products rose. Both manufacturers also raised their full-year earnings forecasts.

And AT&T fell despite delivering earnings of 57 cents a share, in line with expectations. The results showed the wireless phone company continued to grow despite the loss of exclusive U.S. rights to Apple's iPhone. AT&T's first quarter net income rose to $3.4 billion from $2.5 billion a year ago.

The surge in the markets began after Intel released a surprisingly strong reporton Tuesday, soundly beating forecasts with earnings of 59 cents a share on revenues of $12.85 billion, up from 43 cents on revenues of $10.3 billion a year ago.

Analysts had expected Intel to post earnings of 46 cents on revenue of $11.59 billion, according to Thomson Reuters. At least six brokerages boosted their price target for the firm after the results, pushing the stock up more than 6 percent on high volume.

The fact that Intel doesn't expect to be hurt by supply constraints due to the multiple disasters in Japan was also good news to investors, Godine at Signal Hill said.

Yahoo, however, jumped after beating forecastswith first-quarter earnings of 17 cents a share, although that was down from 22 cents a year ago. Analysts had expected the search company to post earnings of 16 cents a share, according to Thomson Reuters.

Cree sank after reporting a 58 percent drop in earnings after the bell Tuesday, followed by several downgrades by stock analysts. The maker of LED products suffered from price cuts.

But VMWare soared after reporting surprisingly strong results and lifted the rest of the cloud computing sector with it. Salesforce shot to the top of the S&P 500. At least three brokerages raised their price target for VMWare.

CSX weakened despite a 30 percent gain in first-quarter earnings as demand and rising prices for shipping offset higher fuel costs. The railroad firm earned $395 million $1.06 a share, up from $305 million or 78 cents a share a year ago.

Meanwhile, gold futures traded above $1,500 an ounce during Wednesday's session, although futures slipped a bit before the close to end at $1498.30. Silver rose 1.24 percent to $44.47.

The dollar sank against a basket of currencies as the euro strengthened to its highest level in 15 months. The dollar index touched 74.27 during the session, the lowest level since Nov. 25, 2009.

Freeport McMoran Copper & Gold, which released upbeat earnings before the bell, soared Wednesday, as did other precious metals companies. The company beat estimates thanks to rising prices for metal and lower mining costs. Freeport McMoran also declared an extra stock dividend of 50 cents a share for the quarter.

Financials was the only sector not to participate in the rally as results by Wells Fargo dragged the sector lower. Wells Fargo slumped after reporting a 5.2 percent drop in revenue to $20.33 billion. Several regional banks that reported earnings on Tuesday, also fell, including Zions Bancorp and US Bancorp.

Meanwhile, Goldman gained after JMP Securities said investors should "back up the truck and buy GS shares" in a note to clients. Goldman shares suffered Tuesday despite delivering better-than-expected results. JMP raised its price target for the investment bank to $198 a share from $183. "There are indeed a few areas of concern, but we believe these to be either manageable or completely overblown," JMP Securities said.

And in M&A news, power company AES said it would buy smaller rival DPL for $3.5 billion in cash, Reuters reported.

On the economic front, existing home sales rose 3.7 percent in March to an annual rate of 5.1 million units from an upwardly revised rate of 4.92 million units in February. Economists surveyed by Reuters had expected a 2.5 percent jump.

A strong showing in European marketson the heels of a successful Spanish bond offering as well as good earnings results also got the U.S. market off to an upbeat start on Wednesday. European markets closed higher.